Inflation Threatens Small Business

NEW YORK -- Don't be misled by reports that inflation is tame. For small business owners, it's a threat to profits and expansion plans.

An 8 percent increase in the cost of eggs over the past year is eating away at restaurants and bakeries. Cotton's 14 percent increase is hurting clothing manufacturers and retailers. And any business that sends somebody on a sales trip is bearing the brunt of an 8 percent increase in jet fuel or 7 percent rise in gasoline.

If this were a "normal" economy, companies could pass along the cost of doing business to customers. But these days, customers are demanding to pay less, not more. As a result, small businesses are often left with no options.

"You have to absorb a lot," says Celeste Hilling, whose skin-care company has seen travel costs rise 30 percent in the past year after a 20 percent gain the year before. Rising fares, baggage fees and hotel bills are to blame.

Many companies have to adjust the way they operate. Hilling's Carlsbad, Calif.-based Skin Authority is doing more training through online seminars rather than in person.

The kind of numbers that Hilling deals with may surprise anyone who believes that the government's Consumer Price Index tells the story of inflation. In the 12 months that ended in March, the CPI rose 2.7 percent. Subtract food and gas as some economists do, and what's left is called "core" inflation. It rose 2.3 percent. That's close to the target of 2 percent set by the Federal Reserve, which sets monetary policy so inflation doesn't get out of hand.

But prices that businesses pay for energy, raw materials, supplies and services have gone up much more sharply. And they're expected to keep rising because demand for many goods and services is soaring in countries like China and India. That offsets slower demand in the U.S. and Europe and sends prices higher worldwide.

Raymond Keating, chief economist with the Small Business & Entrepreneurship Council, an advocacy group, expects inflation to keep rising as the economy improves and the Fed eventually lets short-term interest rates rise from their current levels near zero. He says of small business owners, "a lot of people are worried about how high it (inflation) will go in the future."

Martin Regalia, chief economist with the U.S. Chamber of Commerce, says that while overall inflation "is not a real problem," the components of inflation that matter the most to small businesses – such as energy – are troubling.

The impact of rising energy prices may not always be obvious. Regalia noted that airlines' baggage fees, typically $25 per bag per flight, are the result of rising fuel prices. And energy costs factor into the prices of all goods and services.

Chad Moutray, chief economist with the National Association of Manufacturers, says small businesses are at a disadvantage because they can't buy in bulk like larger companies can. That means a small cosmetics manufacturer can't negotiate the lower prices that a company like Revlon can. And, he said, "they're less likely to pass along their higher prices to customers."

Lorne Campbell, president of Occasionally Cake, two upscale bakeshops outside of Washington, D.C., has refrained from raising prices since his company was launched in 2009.

"A small business is about personal relationships. It's about trust," he says. "A large faceless corporation doesn't have to look at their customers and say, Mrs. Smith, you and your daughter are going to have to pay extra for a cupcake today."

Campbell estimates that he's paying 10 percent to 12 percent more for ingredients and other supplies than he did a year ago. His fuel costs have doubled, although some of that increase is due to the fact he's making more deliveries.

Occasionally Cake has kept other costs down by holding back on hiring, and asking current staffers to take on more responsibilities and work longer hours.

Other businesses can't raise prices because they're under contract to deliver goods or services at a set price. Campus Cooks, which provides dining services for fraternity and sorority houses in the Midwest, Florida and Texas, signs agreements that cover the entire school year. When wholesale food prices rise sharply when school's in session, it's time to get creative.

"If chicken's higher, you change the menu to more fish, pork and beef," says Bill Reeder, president of the Glenview, Ill.-based company. Campus Cooks will also buy in bulk. And if it has to serve, say, more pork, it will vary how the meat is prepared.

Reeder already expects his prices to rise 2 percent to 3 percent for the next academic year. But he's not passing all the costs along.

"We're taking some of a hit on the profit end of it," he says. He's hoping to get another 10 to 12 customers signed for the next year; the added sales volume would help his profits.

Clothing stores are also contending with higher prices – and consumers' tendency to be frugal when they're paying more for gas, food and other items. Jimmy Au's, a Beverly Hills, Calif., men's store, has paid on average 5 percent more for the clothes it stocked during the past year. Alan Au, the store's client relations manager, says prices for cotton, wool and silk have soared. Top-grade cotton has gone up as much as 10 percent over the past year.

Au says the store laid off a sales person as demand fell, and that allowed it to keep most of its prices unchanged. It has raised prices on some high-end suits and on jeans that sell for $200. But for the most part, the store is telling customers, "we'll bite the bullet for you because we appreciate your sticking with us."